US Fed Policy: Will Jerome Powell-Led Panel Hike Rates By 25 Bps Or Pause For Second Time In Row?

All eyes have shifted on the US Federal Reserve which is set to announce policy key rates decision in the late evening of Wednesday. It is widely expected that a 25 basis points hike is stored on the cards, while many would keenly wait for chair Jerome Powell's views on further rate hikes. If Fed hikes rate today, it would be the 11th increase in key rates since March last year. Indian markets traded on a bullish note with Sensex and Nifty 50 gaining by nearly a percent.

In the previous policy, the Fed paused the rate hikes and decided to maintain the target range for the federal funds rate at 5 to 5-1/4 per cent. This would be the first pause after 15 15-month rate hike cycle which began after inflationary pressure escalated following Russia's invasion of Ukraine in late February of 2022.

But markets were already warned of two more rate hikes for the current year by the Fed.

Hence, there is a high chance for a 25 bps rate hike in July 2023 policy.

According to Vaibhav Shah, Fund Manager, Torus Oro PMS, while the pause by the US Fed in the last meeting, cheered the markets, US Fed officials and the minutes released in July made it very clear that the status quo on rates was just a pause and should not be misinterpreted as a pivot. The Fed signalled 2 more rate hikes in this year, with a confirmed July hike as expected by the street.

However, Shah added that the recent data points like moderation in inflation, lower unemployment levels and overall growth signals that maybe the peak of the interest rate cycle is reached and the Fed may keep the rates higher for longer instead of hiking further on expectation of a soft landing for the economy.

Also, Prithviraj Kothari, MD CEO of RiddiSiddhi Bullions Limited (RSBL) said, " At the end of a two-day meeting on Wednesday, it is widely anticipated that the FED will increase interest rates by 25 basis points."

In regards to markets, Kothari added, "Markets appear to have largely factored in the rise, but traders are still unsure of what the FED will signal regarding the next policy. The likelihood that the bank will maintain rates at current levels for the remainder of the year is priced into the market, according to FED Fund futures prices, which is good news for the yellow metal. Gold prices need to sustain above Rs 60000 to continue their bull run towards a new high."

Meanwhile, Manish Chowdhury Head of Research StoxBox said that with the US Federal Reserve all set for a 25 basis points hike at its policy meeting their eleventh total increase since March 2022, the question remains whether the Fed has done enough to make a strong case for a soft landing and a change in its hawkish tone.

Chowdhury added, "We believe that the reaction across asset classes will be dependent on any changes to the inflation and growth narrative and how strongly the Federal Reserve maintains it's monetary policy tightening bias going forward. We will also pay close attention to any comments from Jerome Powell that could hint on whether any further rate hikes are necessary for the remainder of this year. Any signs of a pivot on the back of cooling inflation and labour market would be the perfect recipe for a "risk-on" mode in markets."

On Wednesday, Sensex traded at 66,703.29, up by 347.58 points or 0.52%, while Nifty 50 performed at 19,775 higher by 94.40 points or 0.48%.

Lastly, Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "Globally market participants will be closely watching the Fed chief Jerome Powell's comments about the disinflation process in the US and the likely trend in interest rates. A 25 bp rate hike, already discounted by the market, will not trigger any market move. But if the Fed chief indicates that inflation is coming under control and, therefore, no further rate hikes are needed, that will be a big trigger for markets to move up. But such an outcome is highly unlikely since the Fed will play it safe even if inflation is coming under control."